Investing Billions - E62: Babson College's $700M Endowment on Venture Capital

Episode Date: April 30, 2024

Trish DiGirolomo, investment manager at Babson College sits down with David Weisburd to discuss scaling Babson College’s endowment via disciplined strategy and process. In addition, they discuss the advantages of patience and a focus on cash on cash returns, criteria for manager selection, and leveraging experienced alumni in the investment process.  The 10X Capital Podcast is part of the Turpentine podcast network. Learn more: turpentine.co We’re proudly sponsored by Deel. If you’re ready to level up your HR and payroll platform, visit: https://bit.ly/deelx10xcapital  -- SPONSOR Deel Most businesses use up to 16 tools to hire, manage, and pay their workforce, but there's one platform that has replaced them all: that’s Deel. Deel is the all in one HR and payroll platform built for global work. The smartest startups in my portfolio use Deel to integrate HR, payroll, compliance, and everything else in a single product so you can focus on what you do best. Scale your business and let Deel do the rest.  Deel allows you to hire onboard and pay talent in over 150 countries from background checks to built in contracts. You can manage the entire worker life cycle from a single and easy to use interface.  Click here to book a free, no strings attached, demo with Deel today:   https://bit.ly/deelx10xcapital  -- X / Twitter: @dweisburd (David Weisburd) @trishdigi (Trish DiGirolomo) -- LinkedIn: Trish DiGirolomo: https://www.linkedin.com/in/patriciadigirolomo/ David Weisburd: https://www.linkedin.com/in/dweisburd/  -- LINKS:  https://www.babson.edu/  -- NEWSLETTER: By popular demand, we’ve launched the 10X Capital Podcast newsletter, which offers this week’s venture capital and limited partner news in digestible news bites delivered straight to your email. To subscribe please visit: http://10xcapital.beehiiv.com/  -- Questions or topics you want us to discuss on The 10X Capital Podcast? Email us at [e-mail] -- TIMESTAMPS:  (0:00) Trish DiGirolomo discusses the investment strategy and process at Babson Endowment (4:57) Role of private equity in Babson's portfolio and philosophy on holding positions post IPO (10:34) Importance of patience, conviction, and timing in venture capital investments (13:08) The role of secondaries market in venture capital (16:11) Leveraging relationships and the value Babson brings to a fund (20:16) The structure of Babson's investment office and criteria for assessing potential managers (26:27) Sponsor: Deel (28:31) Diversified alpha and return thresholds (33:07) Importance of conviction and thesis in strategy (41:59) Dealing with difficult personalities in GPs

We're typically a $5 to $10 million check. It allows us to get toeholds in managers that maybe wouldn't normally take on new LPs because we can squeeze in at $5 or $6 million and start building that relationship. Hopefully they're listening. Maybe Elon will take you up on your idea. Elon has listened to an episode.

Oh, that's awesome. Well, we're big SpaceX fans and it's not that I don't want more SpaceX. I think we just want to optimize for owning novel concepts at the earliest stages. And I think we've captured that with SpaceX and Striped in several of our managers. So we want to find managers who are accessing areas

that we don't have privy to at this point. Typically our process when we get past those initial one to two meetings is to take a week, debrief, decide as a group, and that goes to our private equity committee on our monthly call. We'll kind of bat those ideas around. And then ultimately we decide at that point if we're gonna do further work on it. If we are, you know, full memo, full underwrite, that means referencing on-site meetings. David Swenson popularized the model at Yale and he had

roughly 40% privates. Do you worry that you're under allocated into privates? Trish, I've been waiting three months. We've been going back and forth to get you on the podcast. I'm very excited to chat. Welcome to 10X Capital Podcast. Thank you so much for having us. I'm excited to be here. So you run the Babson Endowment, which is a university endowment famous for its entrepreneurship program. Before we get into your background, tell me a little bit about how you went from growing the endowment from 400 million million when you started to $700 million today. Sure. So I've been at Babson since March of 2020. As much as I would love to take credit for the incredible growth that the endowment has seen, it's been driven largely by our private equity

portfolio. So a lot of long-term decision-making has led to that sort of explosion of growth in the last few years. Our investment committee decided to go into private equity back in 2009. And that's really how this started. So the idea was that we could use that segment of the endowment to drive AUM growth while using the public side of the endowment to balance out that risk. And that strategy has really played out for us. So over the last three to four years, we've nearly doubled our AUM, largely driven by our private equity portfolio. At the risk of asking an obvious question, why has your private equity exposure driven total returns? So we find that if you are in the best managers in private equity, particularly as it applies to venture, you can really outperform the public markets over a long period of time. So because we're an evergreen pool of capital, we're able to take slightly larger risk and hold a bit more illiquid in our allocation and to be compensated with that on the return

side of things. So we're really looking at higher alpha, taking a little bit of higher risk and using that to kind of pad our AUM growth versus only growing our AUM through donations. And you're also a university endowment, so that capital does go towards operations. How much of your total AUM goes into operations? Our endowment supports 7% of the operating budget of the school on average. So we have a fairly light lift in terms of liquidity, which has really enabled the endowment to keep the assets in the endowment

and grow that pool of capital so that we can better support the mission of the school. You alluded to it. Endowments have this competitive advantage in their evergreen capital pool. Have you seen that competitive advantage versus other LP asset classes increase, expand, or stay the same over the last 10 years? I think it depends on the LP's strategy. So for us, I would say that advantage has increased over the time that we have been doing this, particularly because of when we started, right? So if we started our portfolio in 2009, sort of on the heels of the great financial crisis, that allowed us to capture kind of some of the best vintages of that era. And we were starting from scratch. So longevity has really played to our favor in that sense. We've seen a lot of those

early investments just now materialize. So at Babson, we're really focused on DPI rather than IRR. So I don't know that returns differ across different types of LPs, but your goals are different. So for us, we're much more interested on the cash on cash return to the endowment rather than how long that might take. Play devil's advocate. Essentially, I understand why you might be MOIC or DPI focused, but essentially you could have taken that capital and reinvested and got more returns. Why do you care more about MOIC or DPI versus IRR? Within reason, right? So we don't want it to take 20 or 25 years for us to get our money back, but we've seen many circumstances where particularly in our early stage venture portfolio, things that were taking longer to materialize have yielded great cash returns to the school.

And, I mean, at the end of the day, for Babson, really cash is king, right? That's what we use to support the operations of the school. So if we can wait, you know, 10 years and get $15 million, we're far more interested in doing that than waiting two or three years for $5 million. And we only make up, in the private equity portfolio, about 25% of the endowment. So we're a target allocation of 25%, which means the other 75% of our portfolio is liquid, and we have that capital available to support the school's needs. So I think it's really about the role that private equity serves for us. Certainly understanding, though, that in fund-to-funds world, pensions world, those draws on your liquidity are a bit different. So the objectives are different.

I was interviewing Harisha from Northwestern Endowment, and she mentioned that they held their Facebook position for five years after it went public. What's your philosophy on holding positions or whether you want your GPs to hold positions post IPO? Sure. We talk a lot about this. And I'm sure Northwestern is very happy that they held that position. So that's awesome. We have a policy in terms of private equity when we receive stock distributions, or now with the advent of blockchain and crypto, if we receive tokens, we turn them immediately into cash. So this isn't true for every endowment, obviously, by the example

you just gave. But for Babson, we are a small team and we have a really robust public equities portfolio. Our public equities portfolio is run largely by our board of trustees, run investment committee and NEPC, New England Pension Consultants. So the idea is that we really trust that we have exposure to the assets that we need through the decisions they've made. And it's not our job as private capital managers to sort of play the stock market. That's not my area of expertise. I promise you don't want me investing your money in the public stock market. So we found it's just easier to immediately turn that into cash to mitigate any issues. In terms of managers holding, that's a little bit of a different situation, right? I think we take that on a case-by-case basis. Certainly, we understand there's a lockup period. Oftentimes,

because we invest on the earlier side of things, our managers may own 10% or more of a company when it goes public, which obviously comes with signaling risk in terms of how you unload that position. For the most part, broad generalization, so no managers out there hold me to this, but we like to see if there is an exit and you're in a positive position that you return some of that capital or take some of the risk off the table. We're perfectly fine with managers holding around half or maybe even a little less if they think there's long-term upside potential. But we do like to see that when it's available, if you've had an IPO exit, that you take some of that off the table to cover your downside. I was watching an interview

with David Clark, who's been on the podcast as well. And he mentioned that he believes that his GPs have an inside advantage after the company goes public. Obviously, in terms of the strength of the management team and the long-term plans, what do you think about that? I think it depends on the situation. I think we've certainly seen circumstances where that is true, particularly in some of the larger IPOs that have happened in recent years that were a big success for Babson, some of which managers of ours are

still holding on to. I think it depends on the level of involvement that the GP has with the manager. I think the opposite of that can also be true. If you invested at pre-seed or seed, by the time you go to IPO, you're likely not still involved to the extent that you were when you first started. And so in that regard, I think it makes sense to sort of take your win. But that's why I say it's a case-by-case basis. I think what we really focus on, it largely across the board with our managers is trusting

their process, right? So if they say that they're holding onto a position because they have asymmetric knowledge, then we have to believe that and support them, right? We're never going to pound the table and say, what are you doing? Get out of this now. That's why we pay them the 2%, right? Because they know better than us the information that's available to them. I think what we want to see is that the decisions that they're making in those circumstances over time are yielding the best possible result. Yeah, there's both an alignment of interest and a conflict of interest. Alignment is understanding the team and knowing the prospects of the company. The conflict is, of course, they're still continuing to charge two and 20 on that public asset. I like to believe that

especially the managers in our portfolio are acting with our best interests at heart. I mean, I think we talk a lot about alignment of interests because I think if you think about the structure of a venture fund in general, there's inherently opportunities for conflicts of interest all throughout how it's set up. So we try not to be too to keep top of mind that the reason that we're paying higher fees to work with them is because they know best about the private markets, right? And if we wanted exposure, large exposure to the public markets, then we could put that money in our public portfolio, right? So I think it's a balance. What is the skill set of a private manager versus a public manager when it comes to the same company? That's a good question. When it comes to a public company, the decision-making criteria to me

is different, right? Because especially if a company has only recently gone public, that opportunity for the public manager to hold that company is new. Whereas for a private manager, it should be kind of the win, right? That's what we've all been building up to this whole time. So I think duration is certainly a consideration there, right? If you're a private manager, it should be kind of the win, right? That's what we've all been building up to this whole time. So I think duration is certainly a consideration there, right? If you're a private manager and you've been holding a position for eight years, that's very different than something that newly IPO that a public manager can go into. I also think you have to consider the role that the asset class serves in most people's portfolios. In public market, the return spread is tighter, right? Like you can outperform by a few percentage points and that's considered a win, right? Versus the S&P or I mean, whatever your benchmark is.

And in the private markets, that's just not true because we're paying higher fees, waiting longer term and taking liquidity risk. Like we want to see significantly outsized returns compared to that of what we could get in the public market. The first ever investment I made in 2008 in the venture class, it took seven years to crystallize. And with all said and done, that's a pretty quick timeline. How do you build the patience necessary to be in the venture class? I'm still working on it. I think you have to use all of the information that's available to you and feel confident that you've made the best decision with that information.

We talk a lot about this at Babson that this job in terms of allocating to venture capital and private equity is a little bit more art than science, especially when you're getting into the venture capital side of things. You have to really trust your partners. You have to believe that they can identify things that other people don't see. And you have to remember that you're paying them to be creative and to think outside the box and to take risks. And that takes time to materialize. So we try to collect data along the way so that we can get a sense of where it's going. But we're never going to really know until normally eight to 10 years in if we're doing the right thing with a fund. And that's something I think you build a muscle for. You have to have conviction. I think that's something we've done to sort of build that

patience is we don't do anything unless we're highly, highly convicted in what we're doing. And that sort of patience and decision-making allows you to be patient in terms of returns. I think where you start to have that sort of anxiety around what's happening, is this the right thing to do, is when you took a risk that maybe you weren't quite comfortable with yet. I think a lot of people say, what stock should I buy? But they never ask the more important question is, when should I sell? If you don't have a thesis going into the stock and the catalyst for growth, telling somebody to buy something, the moment it goes down,

they're going to have weak hands. That very much plays into sort of the hype cycle trends that we see in venture. I think it's true of both managers and portfolio companies in that getting out is just as important as getting in. And you're never going to have all the information to make that decision. If you are at the point where something is underperforming and that's when you're choosing to exit, you're too late. You made a mistake. So I think that's where that data collection and quick convicted decision making is really important. People psychologically always want to sell when it's down and buy when it's up. That's why I find illiquidity quite a feature in the venture asset class.

Oh, it's true. Although I do think the secondaries market is a pretty interesting illustration of that still. We saw a lot of people testing the market with things that they were looking to unload. And it's just an interesting thought exercise because as you're thinking about it, you're not getting paid what you want for that asset class. You're only moving on it because you feel squeezed. So I think while illiquidity helps, there's still a mindset that you have to remind yourself to be patient and see it through. What is Babson's strategy on secondaries? Do you ever sell LP positions? So thankfully, we are very thoughtful about the partners that we choose. So

we haven't had a lot of turnover in our portfolio. We have 16 manager relationships. 12 of those are active, just meaning we've done their most recent fundraise. One of those was acquired through a secondary. So we were very fortunate in that an LP of one of our managers needed some liquidity quickly. We were able to get a position in their fund one and their fund two. And that's how we started the relationship. That's one of our lower middle market buyout groups. So I would say in that sense, we'd love to take advantage of it from there. It's not something that we heavily monitor just because we have such a small team. I think our sourcing efforts are better focused elsewhere and we can build high conviction relationships through other portals.

But we certainly keep that open-minded in times of dislocation. I think it can be a really interesting entry point. In terms of selling into secondary markets, fortunately, we've never been in a position where we needed to do that. I think there can be some negative selection bias there. As I mentioned, Babson is pretty fortunate in that we support a small amount of our school's operating budget, so liquidity crunch isn't typically an issue for us, which means if we're looking to sell a position, it's probably because it's not performing that well. And that's never a position of strength to be selling from is because something's not doing what you want it to do. Fortunately, we haven't

had that issue. I think we've been pretty thoughtful in both relationship selection and just choosing high quality investors. In terms of selling via secondary, it seems like even when the manager is performing poorly, you would still have to take a 20% to 30% discount off the NAV. Is there ever a reason to sell via secondary outside of liquidity issues? We haven't run into this before, but if I am purely speculating here, I think the outside of liquidity issues, the only time you would really want to do that is if you were drastically over-allocated. That's another place we've been very fortunate. I think, you know, our, our target allocation is 25%. I think at maximum, we were at like 32%. So we never had to take a pause or take our foot off the gas, which I'm very grateful for. But that's the only

circumstance I would think that it makes sense in. The other times that it makes sense is if you are starting over, right? If someone's building a venture portfolio from scratch, they might have a legacy portfolio. It can make sense to kind of bundle that up and just sell it for whatever you can get for it so that you can have a fresh slate. Maybe you've hired a new team. So there are circumstances where I think it makes sense, but it's certainly not my first choice. Would you ever acquire stakes at par in order to access to a relationship that you want for long term? That's an interesting question. Because we are so relationship-focused, even if it takes a long time for us to access funds,

we want to have that buy-in from the manager. And so if we were having to buy at par to get access to a fund, to me, I'm sort of inferring from that that we've tried to go through the front door and couldn't get in. And so then I think the question would really be, is this the right alignment of interests?

We don't want to be where our partnership's not wanted, and I'm sure that GP wouldn't want that either. So I'm not sure. I think it would depend on the circumstance. Trish, you're so likable. You represent Babson Endowment. Why would a GP not want Babson in their fund? I don't think, we haven't really had that circumstance. Babson is, I think many GPs resonate with Babson just because of the mission, especially in the venture world. I think largely the reason that we've ever been access constrained to something is simply that it's oversubscribed and we got there too late. One thing that I have playing to my advantage, it's very nice of you to say I'm likable. I'm not sure that everyone would agree, but I think I am a small check.

So that's an easier sell than you have to like Trish DiGirolamo. You know, we're typically a five to $10 million check. One to $2 million is really meaningful for us. So it allows us to get toeholds and managers that maybe wouldn't normally take on new LPs because we can squeeze in at $5 or $6 million and start building that relationship. So in that sense, I'm very fortunate. My job's quite easy in terms of sell. You know, we're never going to be your biggest check, your terms driver, high demand LP.

You know, we really just want to be supportive partners, long-term oriented. And the chances that we're ever going to be above a $10 million check in the next 10 years or so is probably pretty slim, barring some sort of huge outcome. So it has been a great selling point for us to access some managers that are typically a little more oversubscribed. Speaking of access, what value add does Babson bring to a fund? You know, I think it depends on what the fund is looking for. I think Babson has a very sophisticated alumni base, many of whom are allocators in their day job, and then several

of whom are also venture capitalists or buyout managers. So I think we have a really good understanding of how the private equity landscape works. And I like to think, and maybe my managers would disagree with me, but that we're pretty good at reading the room. So there's many managers that we work with that are really well-established. They've been around since the 90s or even the late 80s, and they don't need a whole lot from Babson. They need us to send our capital calls on time, come to the annual meeting with thoughtful questions, and, you know, continue to be supportive partners. And we're fine with that. We don't need to be heavily involved. And then we have other managers who, you know, maybe are a little bit newer or looking to put on events or have, you know, mentoring programs that we can get involved in. I think the great thing about Babson is it's a place for creativity and for thinking outside the box. So I don't think there's really ever been a circumstance where a manager's asked us for help with something that we weren't willing to jump in and do. Because we are on the smaller

end of the check size, we're not typically on LPACs, but we will join advisory boards. One of our biggest assets to GPs is really being flexible. Whatever they need us to be in terms of a partner, we're willing to do that. You guys leverage your alumni base maybe more than any endowment I've ever interviewed. How do you leverage your alumni base? Sure. So there's a number of things at play here. It's a little bit long-winded, so bear with me. So we think of our endowment kind of divided down the middle, or I guess the quarter. A quarter of it's in private markets. The rest is in publics, real estate, fixed income. We manage the private markets portfolio totally in-house. So while I'm responsible for the entire endowment, I'm only a true decision maker when it comes

to private equity. I have one associate on my team full-time, and that's sort of our investment office, if you will. Two people. Two people. But there are much more of us involved, I promise. It's not just us. So then the board of

trustees runs our investment committee, which is made up of all Babson alumni. They all have specialties in different asset classes, whether that's public equities, fixed income, any of those I just mentioned. And they partner with any PC who has been with us for over a decade. They're fantastic to make decisions regarding our public equities portfolio, really anything that falls outside the realm of private equity. So that's one way we leverage the alumni. Then when we established the private equity program back in 2009, they established a subcommittee, which is an advisory board, basically called the private equity committee. That's another group of alumni, six individuals who are all in the private markets world in some capacity that serve as an advisor

to the decisions made for the private equity portfolio. So in the same way that any PC consults on our other asset classes, the private equity committee consults on our private markets decisions. So the board of trustees and myself are the fiduciaries for the school, but those two groups of alumni are hugely instrumental in all of the decision making that happens there. In addition to that, we also leverage the Babson MBA program. We hire two students every year for a two-year rotational basis that serve as the analysts to support our associate on the team. So rather than having a full-time analyst position that turns out every two years, we leverage two students from the MBA

program. So we have four working at a time who help support our investment team in terms of data analytics and things of that nature. How competitive are those positions? Very competitive. And you joined via that program, right? I did. I did. I was one of those analysts. We really would love to expand it because there is such an appetite. But unfortunately, just in terms of time management, I wish I was a professor. I'm not a professor. And they don't get school credit for participating. So we've had to limit it to two students.

But yes, it's been wonderful for the school. So I came through that program. I actually started managing the endowment before I graduated my MBA program, which was an adventure. How much of your GP managers do you add through outreach versus inbound? You know, it's kind of tough to separate. I would say we get a lot of inbound. You know, a huge portion of my job really is sourcing. I think we get a lot of ideas from our alumni base. So our advisory committee is great about sharing ideas. But then typically that involves us either reaching out to the people who

they've mentioned as potential targets or me going through my enormous inbox to find out if they've reached out to us. I think we take kind of a sort of a barbell approach to this, I guess you might say, in that Babson is never going to deny someone at least a 15 or 30 minute intro call. We want to make sure that we are covering a very diverse set of managers, a very broad universe, and that we never get stuck in the trap of like, we only take warm intros. That being said, warm intros are really important, right? And some of our most successful relationships have come out of those kind of connections through our committee or through another Babson alumni. And so we value those greatly. So what that ends up meaning is we probably take, you know, 500 to a thousand

inbound calls a year that go into our pipeline and we monitor those relationships and try to keep up with them as best we can. But when we see something that really fits what we're looking for, we go after it pretty hard. And that I would say falls more into the category of outbound, you know, then the onus is on us to check in and try to get in front of those people ahead of their next race. What exactly are you looking for? Yeah, so I think I'll give my sort of general answer. And then we can go from there, because I imagine it's going to be similar to what a lot of LPs say. But you know, the four things that we look for when we're assessing any manager is team, track record, strategy, and then what we call Babson fit, which I think is the piece that you're getting at is,

you know, there's plenty of times where we meet a fantastic team that has a really great strategy and a long track record. Maybe they're a spin out of somewhere, but they have a lot of overlap with something we already have in our portfolio. And, you know, maybe we're overweight in that area. And maybe the fundraising timeline doesn't make sense for us. And so, unfortunately, it's not a Babson fit and we can't move forward on it. So I think that's the trickiest part of our sort of investment thesis to get GPs to understand is sometimes it really is like not you, it's me. I think being honest when it is them and not me, it makes that a little bit easier to believe. But, you know, that's kind of the core criteria of

how we assess. So that means that what we're looking for kind of shifts depending on how our portfolio is looking. Right now, I think we are focused a lot on remaining open-minded in venture, not trying to get too prescriptive in terms of we only do funds of this size or we only do funds in this sector. I think you have to go where the best people are and they will lead you to the best returns. So we try to lead with that in our decision making. But we're about 80% B2B technology. So if we're going to do a B2B technology fund, it has to have complementary networks. It can't be a pure network overlay to what we already have access to. Just to play devil's advocate there, if you had two funds that were in great assets, call it SpaceX, Airbnb, and Stripe, wouldn't you want more exposure to that? Why are you optimizing on diversification? It depends on the maturity and makeup of your

portfolio. So short answer to your question is yes, if I could have SpaceX and Stripe in all of my managers, I would happily do so. But we are already at about 27% of our 25% allocation. So we're really in a phase of augmenting rather than building. So what we have in front of us, we're able to look at and say, okay, we have overlap of probably of our 16 managers, maybe four to six of them overlap frequently. And so if we're going to add something, we want it to be exposure to an area that we believe has outsized return profile that we haven't accessed yet. So we're going to add something. We want it to be exposure to an area that we believe has outsized return profile that we haven't accessed yet. So we're really looking for inefficiencies in the market that we haven't yet covered. And I think where people kind of fall into a trap in venture,

and this is purely my opinion, but how I think about it is I never want Babson to be in the position where we're just chasing what everyone else is chasing, right? And when people entered SpaceX and Stripe, they weren't so obvious. But now there's a million managers who have SpaceX and Stripe at all different stages of venture. And the return profile- Including us, not Stripe, SpaceX.

Well, it's a great asset to own. And we have a lot of SpaceX in our portfolio. I'm just hoping they're gonna do some asteroid mining. I'm trying to inception the idea, but we'll see. Hopefully they're listening. Maybe Elon will take you up on your idea. Elon has listened to an episode. He did tell Scott Painter. So he has listened to at least

one episode. Oh, that's awesome. Well, we're big SpaceX fans and it's not that I don't want more SpaceX. I think we just want to optimize for owning novel concepts at the earliest stages. And I think we've captured that with SpaceX and Stripe in several of our managers. So we want to find managers who are accessing areas that we don't have privy to. You're looking for diversified asymmetry. Yes. We'll continue our interview in a moment after a word from our sponsor. Most businesses use up to 16 tools to hire, manage, and pay their workforce.

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You can manage an entire worker lifecycle from a single and easy-to-use interface. Click the link in the show notes below to book a free no-strings-attached demo with Deal Today. You called it diversified alpha. What do you mean by diversified alpha? So I think the way that we think about this is we want, of course, alpha in all areas of our portfolio, right? The goal of the endowment is to multiply and preserve our capital. But I think where we diversify is we don't want all of our eggs in one basket, which this is not, of course, a revolutionary concept, right? I think many people believe in diversification. I think what makes Babson's approach different is, you know, I think a lot of times people think about diversification as a way to

consistently outperform benchmark, but avoid the extremes, right? And that's not really our goal at Babson. I think we want to use our venture and private equity allocation to capture as much of that upside as possible, but then diversify throughout our public portfolio so that we're not too overexposed in a way that we're uncomfortable with for any one market cycle. So we did, you know, coming into the 2020 dislocation, we had a growth tilt both in our private equity portfolio, obviously, but then also in our public portfolio, which served us really well. I mean, as a large contributor as to why we've had so much growth in the endowment, but we took it as a moment really to rebalance and say, you know, we're still capturing so much

of this growth tilt through our private equity portfolio. Maybe we'd be better served in this next market cycle to have a little bit more value in our public's portfolio. And so I think that when we think about diversified alpha, that's what we mean is how can we make sure that we're not playing it too safe and we're still looking for alpha, but we're not overexposed all over our skis in one sector stage allocation anywhere. Even though you don't have liabilities or funding liabilities above and beyond the 7%, are you implicitly underwriting to some return threshold? Yes. So we underwrite, and I speak only for the private equity portfolio here, I think our return threshold varies more across our other asset classes. But in private equity, we underwrite everything to a

minimum of a 3x net. So that includes any buyout allocation as well. And then obviously, as the risk profile increases, our expected return increases. So in early stage venture, we're ideally hoping for more of like a 5x net, maybe even 10x net, if we're really lucky, if we have SpaceX. But I think that's the minimum for us, for us to feel like the duration and the illiquidity is worth it is 3x. David Swenson popularized the model at Yale, and he had roughly 40% privates. Do you worry that you're under allocated into privates? I don't. Look, I'm unabashedly a private markets person. My committee knows this well. I mean, if I could increase our allocation, I would love to have more money to put to work. But I think

it's right for the school, the way it's structured now, given the size of our endowment. We have had a lot of growth. And I think, compared to the size of the school, 700 million is certainly a robust endowment. But when you look at it compared to the other endowments in the universe, it's not all that large. And so I think we are able to take advantage of the opportunity in the private equity market with the amount of capital that we have, without putting the school at too much risk, given that we are taking a higher risk approach. I think when you get into 40%, 50%, you have to be a little bit more prescriptive in how you're structuring your private equity portfolio in terms of buyout growth venture. Whereas Babson, because we have a small pool of capital, we're able to... I mean,

we're about 70% venture in our private equity portfolio, which I think gets harder if you're dealing with a much larger pool of capital, just kind of based on how venture works, right? I think in order to capture the power law, some concentration is helpful. And so I think our allocation has kind of imposed that concentration on us in a way that's allowed us to build a really strong group of managers. I want to double click a little bit back on manager selection. We talked about the BAPs and FIT. What about the other three factors? What do you look for in terms of managers? I'm always asked to rank which one's the most important and that's really hard. Rank which one's the most important. I think it's team. I think it is. You know, it's the hardest one to quantify, right? It's a little

bit, can be even very hard to describe, right? When you're bringing something to committee to recommend, you know, as much as it is true, it's not a great selling point to say, this person's just really special, right? People want to know why. So I think what we look for in terms of team, certainly if you're a partnership, we want to see a history of working together, you know, how you interact. Is there a mutual respect? Obviously things happen, partnerships don't stay together forever, but we want to feel reasonably good that you enjoy working together. And then I think there's personal characteristics that we look for and it might vary a bit across venture and buyout, but you know, grit, self-awareness, I think extreme ownership is really important. Transparency is a huge one for us. I would so much rather know

what you're dealing with and what's going wrong than get the weekly or the biannual update of everything is great when we can clearly see that maybe everything is not. So we really look for that honesty. And that comes through in the diligence process. Referencing is hugely important. We try to talk to as many people as we can before we go into a new relationship. But for the most part, we often know people for years before we partner with them. So I think in assessing the team, that can be helpful. And then the final thing I'll say on team that we look for that we've tried so hard to figure out how to put this into words. And I think what we ultimately come back to is what we call a unique view of the world. And I think this

is particularly important in early stage venture. And what we mean by that is just like an unending creativity and sort of a wonder of how you think about the world and how you think about the possibility for the themes that you're investing in. And I think it also indicates an ability to sort of skate where the puck is going, not where it is. And if you can do that slightly ahead of the rest of the market, to us, that's like a slam dunk. That's what we want. And then in terms of strategy, I often am asked, what's the best portfolio construction? I think we don't really think about it that way. We want people who are convicted in what they're doing and have a strong explanation for why they're doing it. Right. So, you know, if you are ownership focused and you believe that you can get, you know, 15 to 20% ownership in something, and then

you don't have to worry as much about the size of the outcomes. If you have, you know, proof points of you doing that and a reason why you really believe that will support you just as much as someone who maybe, you know, is a home run strategy who has slightly lower ownership but believes in astronomical outcomes. I think there's room for everyone's point of view in venture. It's really having conviction and a thesis behind why you believe what you believe is what we're looking for. Nothing is more disappointing to us than when you say to someone, you know, why $50 million? And the answer is because that's how much we could raise, right? We want to have some- Sounds like a good size for fund one. Right. That's what someone said fund one should be. You know, like we want thoughtfulness throughout

the entire process. We tend to be drawn to high conviction strategies just because that's very much how we allocate. So that tends to look like slightly smaller fund sizes, you know, kind of more conviction in what you're doing, and maybe slightly less shots on goal with higher ownership. I would say if you looked across our portfolio, that tends to be true, but not 100%. So high conviction will lead to more volatility. So do you have the stomach to have a fund that's a 5x and then a 2x and then a 7x and then a 0.9x? Do you have what it takes as an LP to weather that storm? I do think there is more volatility. And I think, yes, Babson does have the stomach to do that. I will caveat that by saying I don't have the stomach to do that 16 times, right? So this is where kind of the diversification of strategies can be helpful.

You know, we don't do a ton of the stage agnostic large venture funds. Just given our return profile, it doesn't always align. But we do have a couple of them in there that are really long-term relationships for Babson that serve a role in our portfolio. You essentially want the best-in-class seed fund and then best-in-class series A, and then if you choose to do growth, best-in-class growth, and together you replicate the multi-stage strategy. That's correct. I think given that we're targeting 3x net or higher, when you get into those multi-stage strategies, so they're hugely diversifying, it can be really difficult to count on a 3x net. If I have a 5x net, a 2x net, a 7x net, on average, I'm still at my target return.

And I think because we are fortunate enough that our board and IC really understand the venture asset class well, and quite honestly, the lower middle market buyout asset class as well, there's volatility there too. It's more downside protected, but it has higher upside and therefore you are going to have some misses. So I would say we do have the stomach for that. The key is in differentiating what's just one bad fund or when have we gone off course. You mentioned you have two full-time team members. Between you and your team member to take a look at that fund, walk me through the process. Sure. So depends on how the fund came to us. So my associate's name is Luis. If it came in through Luis, the next step would be for that manager to have a call with me and him together. If it came in through me, the within my team of two, do we want to move forward here? At that point, we'll request further information. We really try not to take people's data rooms without a reason. People, I think that have become so much more forthcoming

with them, which is wonderful, but we try to be respectful. So once we've taken data room, we'll put together a preliminary memo and that goes to our private equity committee on our monthly call. So we have a section of those monthly calls. Doesn't happen every month. I'm trying to get us there. But where we talk about sort of perspectives in our pipeline of what's interesting. And so we'll kind of bat those ideas around. People kind of go back and forth.

Yes, I'm interested in this. No, I hate it. You know, that kind of thing. And then ultimately, we decide at that point if we're going to do further work on it, if we are, you know, full memo, full underwrite, that means referencing onsite meetings. Typically this is where the more robust data analytics would happen for private equity managers as well. You know, I'm not going to have my team do full value bridge and things like that if we're not leaning in. And then from there, that process probably takes, you know, two months on average. And at that point, we will vote at the private equity committee level on a recommendation.

So I would come and say, I'm recommending this fund. I think we should bring this to the IC for a commitment of $8 million. And they go around the table and we vote yes or no. So there's six members of the private equity committee. I'm the seventh vote. And we go from there. So say, yes, we get approved. Then we go, yes, majority.

We really strive. And I always laugh when managers say this because it's exactly how our process works too. We strive for consensus, but we are not consensus decision-making. So if the majority is a yes, we're moving forward. However, if there are strong opinions as to why it's a yes, we're moving forward. However, if there are strong opinions as to why it's a no, we want to hear them out. And I'm sure as I continue to describe

our process, people are thinking, man, this is a lot of hurdles to clear. And that's definitely true. But I think it drives us to make really good decisions. And as much as I like to think that I make good decisions, if it was just me making these decisions in a vacuum, I don't think we would have the kind of the top decile results that we've had. So I try to remind myself of that when I'm scheduling many, many meetings. A lot is said about portfolio construction of GPs. Not a lot is said about corporate governance of LPs, which also drive returns, process drive returns on the LP side as well. Absolutely. And so then the final step is private equity committee says, yes, you get the recommendation. I present at the investment

committee. We present everything, including re-ups. And then they say, yay or nay. So we have never been turned down at the investment committee level. And that is because my private equity committee is brutal. They will tell you if they don't like something and it will never even get to the IC if it's not worth them seeing. We'll get right back to the interview. But first, to stay updated on all things emerging managers and limited partners, including the very latest data on venture returns and insights on how to raise capital from limited partners, subscribe to our free newsletter at 10xcapitalpodcast.com. That's www.10xcapitalpodcast.com. So you mentioned you strive for consensus. It's well-known industry knowledge that some of the

best returns ever for GPs were non-consensus and right. Why is that different on the LP side? And have you found that your best manager ideas were non-consensus? I don't think it's different on the LP side, which is why we don't have a firm sort of ruling or rule that it has to be 100% consensus. And I also think as my role has evolved at Babson, this process has changed a bit. Babson was completely volunteer run until 2016. And then up until probably 2021, the private was still very, the private equity committee was still very heavily involved in manager selection. Now it's to a point where I come to them with all of the work done. And so I think the way we look at it is we want everyone to feel as though they're

heard and we want all of the grievances to be aired, right? All of the questions to be asked. But ultimately our committee is going to defer to the people who are closest to that manager. And so sometimes that's just my team. Sometimes that's, you know, me and maybe two of the LPs on the committee also have this manager in their portfolio, or maybe they used to work with this manager. And so they know a little bit about them. And so I think our committee has gotten really good at sort of weighing the information

in terms of their level of access to that information. And it allows us to sort of see around corners and not have any blind spots, but it doesn't hinder conviction. So there's certainly been times where, you know, people maybe aren't sure. And I'm saying, I did the diligence on this and I believe this is the best thing. And unless I'm glaringly wrong, you know, they're going to support me in that. Now have some of our best managers been non-consensus? I think the answer to that is yes. You know, I think we often have an easier time getting to consensus on some of the lower middle market buyout deals. I think there's just more data to go on. Oftentimes those people have independent sponsored track records. You know, it's an area that many of our committee members have a lot of experience in. And so I

think we've done really great deals there, but those tend to be more consensus. And then I think some of our venture deals, I think people try to defer to the people who are the highest, or I guess have the highest level of information. But it also means that they're more intense discussions, right? And maybe we're all a yes, but we're not all yes at the full size. Or maybe there's caveats on, you know, I'm okay with this, as long as we see how the first three funds go. So it's very case by case. It's well known that some of the best GPs are difficult personalities, to say the least. How do you avoid picking managers just on likability or on not being difficult to work with versus picking pure alpha in your portfolio? You know, I feel like for the most part,

GPs just want you to understand their perspective. And I think people can be likable in different ways. And I'm not trying to be like politically correct here in any by any shape. That's a new one. But I think you have to you have to take a step back and look at it from their lens. Right. And if people can sometimes come off as, you know, highly convicted, very sure that their way is the right way, sort of that with or without you kind of pitch that is very popular, I think, in tech. And I think you have to ask yourself, like, what is their true intention? Like, I think sometimes people, that can be a bit of a front, right? I think we work with some of kind of the most well-known GPs out there, and we get along well with all of them. And I think that comes back to that flexibility that we were talking about is understanding who a person is and what they need from you when you partner with them ahead of time. I think oftentimes GPs get labeled unlikable when maybe the relationship dynamics weren't clear from the start.

Misalignment. Yes. But I will caveat everything I just said by Babson is known for being a very accepting, creative, fun place to be. And we want that to show through in the people that we partner with. So I think you don't have to be in every great manager to achieve great returns. All of your managers just have to be awesome. So especially when you're a portfolio of 16, right? We couldn't even be in every great manager if we wanted to. So then I think sort of the no jerk rule kind of comes into play, right? They don't want to work with us if we're making their life hard. And the same is true on the flip side. We can access another great manager who's better aligned with our goals and our mission that will hopefully generate similar returns. So I just don't think there's enough GPs out there that are that bad of actors that you can't make it up somewhere else. You know, like life's too short. Controversial question. Would you ever invest in a manager that didn't really give you access to

them? They historically wouldn't give us access. And then all of a sudden they did. Yeah. So I mean, literally access to them. They say, look, Trish, I love you. I want to help Babson. We're a $2 billion fund. We've returned 3x DPI for 20 years. We'll give you access, but you're not going to have access to our managers. Sure. It's hard. Typically, that doesn't happen off the bat, right? Especially the way Babson invests. I've seen, by the way, big private equity funds with side letters that say, if you invest less than 10 million, Basically, it's more than a hypothetical. I thought it was very cool. It made me very excited that I was in the fund.

I'm like, you don't need to ever talk to me. Just give me returns. Just give me returns. Yeah. I mean, I think it is circumstantial, right? If you're going to act that way, you better back it up. But those side letters definitely exist. The key question for Babson is, are we meeting all of our fiduciary and governance responsibilities?

If the answer to that is yes, then fine. I don't think that we've had that circumstance come up too frequently. For the most part, our managers are very engaged with us and tried to be great partners across the board. I think where we see this the most is as generational transitions start to happen, right? There's someone else kind of moving into that personnel management or LP management role. And as much as you might try to reach out to your old contact there, you're being consistently redirected to that other person.

And that's okay. I think that's the evolution of a fund. Now, if we were underwriting something brand new and they said, we're busy, these are the returns, invest or don't, that's a different story. That's probably a no. We talk about generational transfer, but a first principles question is, what is the value in a VC brand after the GPs have left? I think it depends on who their junior staff are. Do they have a plan? There know, there's, there's 1000 examples of where there is no value left, right? And everything just kind of shuts down. I mean, I think Is that determined like a decade before through apprenticeship? Essentially, that can't be done just in time, correct?

Yes. I mean, I think it could be done just in time, but it likely won't be successful. You know, there's exceptions to that rule. If you know, something happens with a managing director, and there's three other GPs there, maybe the ethos of the firm stays. But the most successful generational transitions we've seen are planned far in advance. And ideally, they happen before the generation that's transitioning is gone. When it happens suddenly, I think that's where there's issues. But certainly, I think more generational transitions go wrong than go right. We have probably three groups in our portfolio who have undergone generational, four, four actually, that have undergone generational transitions that have been very successful.

And I think what they did was the person who took over the firm has been there for 20 years since they were an associate. And they know the ethos and they're able to keep all the trains running on time. I also think it depends on the structure of your fund, right? If you're one of the more boutique seed stage funds that have three partners and a CFO, there is no generational transition, right? You essentially have to hire your replacement. That's really difficult to do. I think in the larger firms, there's more infrastructure to support what's built. And that makes the generational transition a little bit smoother.

Well, I felt like I got an MBA in this chat, Trish. I really appreciate it. I really appreciate you allowing me to probe on all these controversial topics. What would you like our audience to know about you, about Babson, about anything else you'd like to shine a light on? I think, I mean, you know, we just really want to continue to support the private equity ecosystem at Babson. You know, we're very active

in the early and seed stage areas of the venture market, in the lower middle market, buyout market. And we're true believers in supporting innovation and furthering entrepreneurship. So to the extent that we can be helpful to, you know, GPs, founders, anyone, you know, please don't hesitate to reach out. But this was really fun, David.

Thanks for having me. It was my pleasure and look forward to seeing you very soon. Awesome. Thanks, Trish. Thank you. Thanks for listening to the audio version of this podcast. Come on over to 10xCabell Podcast on YouTube by typing in 10xCabell Podcast into youtube.com and clicking the subscribe button.

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